Morningstar | Brightloom Can Help Starbucks Solidify Moat Via Throughput, Loyalty, and Operation Enhancements
We find wide-moat Starbucks' investment in Brightloom (formerly Eatsa) strategically significant because it can (1) help to unlock new opportunities for the company's existing digital platform, (2) allow the company to streamline restaurant operations and improve the customer experience, and (3) open the door to new restaurant configurations, delivery capabilities, and partnerships. Under the agreement, Starbucks will license its customer engagement platform to Brightloom, which will then develop a comprehensive technology platform for Starbucks as well as other restaurant operators using its assortment of digital ordering, kitchen operations, pickup, and customer engagement solutions. The move also reunites Starbucks with Adam Brotman, who joined Brightloom as CEO in April but previously served as Starbucks' chief digital officer; he should help make this a seamless partnership.Starbucks' digital platform has posed challenges at times in the past few years, as it was difficult for a brand built on experience to pivot to convenience via mobile ordering and other technologies. We believe this partnership will reduce friction from the ordering queue, facilitate greater throughput, and enable greater customer engagement through loyalty program, delivery, and mobile communications improvements. Technology is rapidly becoming a crucial intangible asset for restaurants looking to build an economic moat, and we believe Brightloom will offer one of the first end-to-end integrated platforms for Starbucks and other restaurant operators.
The size of Starbucks' investment and other considerations were not disclosed, but we expect operational benefits as early as calendar 2020. We'll wait until Starbucks' third-quarter update later this week to adjust our $80 fair value estimate, but we believe this partnership will keep global comps comfortably within management's ongoing 3%-4% target while offering upside to its adjusted operating margin goal of 17%-18%.
We highlighted Eatsa in our October 2018 restaurant industry collaboration report with PitchBook, "The Restaurant Industry Is Evolving--Your Key Performance Benchmarks Need to, Too." In that report, we focused on the platform's ability to increase speed of service, improve order accuracy, strengthen customer engagement, and streamline workforce and operations for restaurant operators. We believe that each of these goals will be a consideration for the new Brightloom platform, with Starbucks likely to be the early beneficiary. While extremely early, our conversations with the team from Brightloom as well as restaurant operators that have adopted the platform (including Chicago-based Roti and Wow Bao) suggest that Starbucks stands to improve its annual transactions per square foot (which has averaged 144 the past five years) by 10%-20%, improve its loyalty/nonloyalty transaction ratio to around 4 times (putting it on par with industry leaders, compared with its current levels around 3 times), and improve sales per labor hour (currently around $43). With the improved throughput capacity (some of which would be the result of increased delivery transactions), loyalty program engagement, and operational efficiency, we believe there could be as much 5%-15% upside to our current fair value estimate, which assumes 8% average top-line growth and operating margins just over 18% over the next five years.
Starbucks is a roaster, marketer and retailer of coffee. The company's segments are: Americas, which is inclusive of the United States, Canada, and Latin America; International, which is inclusive of China, Japan, Asia Pacific, Europe, Middle East, and Africa; and Channel Development. The company's Americas and International segments include both company-operated and licensed stores. The company's Channel Development segment includes roasted whole bean and ground coffees, Seattle's Best Coffee?, Starbucks- and Teavana-branded single-serve products, a variety of ready-to-drink beverages, and other products sold worldwide outside of the company's company-operated and licensed stores.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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